Compound Interest Example: Now, let’s say you’re going to need a little more time to repay the loan. Let’s say you need 30 years (typical mortgage) to repay it.
$100,000 * 6.5% * 30 years1
So, your banker punches the numbers and says, “OK, here’s your monthly payment.”
- Monthly payment = $632.07
- This is where most people stop. All they care about is the monthly payment. “Sure, I could afford that! That’s only $632.07 per month!”
But are you looking at the big picture? Keep reading the loan terms.
- Total borrowed = $100,000
- Total interest = $127,544.49
- Monthly Payment = $632.07. (Don’t stop here. Keep reading!)
- Total payments = $227,544.49
Look at that. On this loan, if you made every payment on time, you would pay $227,544.49 in payments for your $100,000 loan. You would pay more interest than you would have paid for the original loan. Who in their right mind would pay $227,544.49 for something that cost $100,000? Apparently we all would. That’s how a mortgage works, and that’s what people pay. But still…. That’s a lot of money!
Let’s look an another typical example. Shoes!
- The formula is a little more complexed than this, but this is the general idea. When the bank amortizes the loan, it makes it so that you have equal payments over 30 years. It’s complicated, and so people just throw their hands up and say, “OK, bank, whatever you say! I can do that!” But it’s really not that complicated. Read on for TIPs on how simple it is to save a fortune. ↩︎